Foreclosure is a
process in which a lender attempts to recover the amount owed on an outstanding
property loan once there is a default of payments. This is usually done by
selling or taking ownership (repossession) of the property. The foreclosure
process begins once the lender files a public notice of default (NOD), or in
some states a lis pendens (LIS).

Once an NOD is filed,
the property officially enters a grace period known as pre-foreclosure (length
determined depending on state). Pre-foreclosure offers the borrower an
opportunity to do several things before the property is repossessed and/or
sold, and ultimately reported on their credit history.

The borrower can
reinstate the loan by paying off the default amount plus fees.

The borrower may
negotiate a Loan Modification with the existing lender.

The borrower can sell
the property to a third party and pay off the outstanding loan(s).

Should a loan remain
outstanding once the pre-foreclosure period has ended, the bank then repossess
the property to secure the loan. Usually, the lender takes ownership of the
property with the intent to re-sell.

Good foreclosure deals
are available; however buyers need to be cautious. Tax or mechanic’s liens
placed on a property can drive up the purchase price. Once you have located a
property you are interested in purchasing, it is important to have your
REALTOR® check the property records for these kinds of contingencies.

It is also crucial
for buyers to come educated about local state foreclosure laws, which differ
from state to state.Some states follow
non-judicial foreclosure procedures and others require the lender to sue the borrower
before taking ownership of a property in default.

Buying a Foreclosure

1. Get Financed

To be considered a
serious buyer, sellers want to know that you are financially positioned to
purchase the property. The best way to do this is to get pre-qualified before
engaging in any negotiations. Work with a lender who has experience with the
foreclosure process and who can guide you through the crucial steps of dealing
with this kind of purchase (if you don’t have a trusted lender, your REALTOR®
can recommend one). Your lender should provide you with a ‘loan
pre-qualification letter’.Obtaining
financing information helps you understand what you can afford, and enables you
to move quickly once you find a property that you want to purchase.

2. Contact Your
REALTOR®

Whether you are a
first-time homebuyer or experienced investor, it is always wise to work with a
REALTOR® when dealing with foreclosures. When interviewing potential agents, be
sure to inquire about their experience with foreclosure properties and find out
if they hold any designations for buying and selling distressed properties.

3. Contact the Seller

Depending on the
progression of the foreclosure, the seller will either be: the property owner
in default; the trustee; or the foreclosing lender.

Owner in Default

The seller will be
the owner in default during pre-foreclosure. Pre-foreclosure typically offers
investors and homebuyers the best bargains, but it can also be a difficult
stage to purchase a distressed home, as the lender often has the final say.

Buying a property
during pre-foreclosure involves making an offer to buy directly to the owner in
default. The owner may or may not know they are being foreclosed upon, and will
undoubtedly be under a lot of stress, making negotiations difficult. If the
purchase offer is less than the secured loan(s), then the lender(s) must also
be included in the negotiations.It is
important to remember that pre-foreclosure can last several months, so patience
is essential when considering this purchase tactic.

Aside from the
challenges of pre-foreclosure, selling the property before foreclosure can
offer the owner in default an opportunity to walk away with some of the equity
in their property, and avoid damaging their credit history. The buyer may also
benefit here, with more time to research the title and condition of the
property, and often times realize good discounts below market value!

Trustee

If the loan is not
reinstated by the end of the pre-foreclosure period, the property is sold at a
public auction. Commonly, buyers are required to pay cash at auction and time
is limited (if any), to research the title and condition of the property
beforehand. Public auction can offer great bargains however, and buyers are
able to avoid dealing directly with the owner in default.

When bidding on a
property at public auction, you should be aware that you are competing with
seasoned investors. Remember that cash is typically required to buy, and if
there are any money encumbrances (i.e. tax liens, mechanics liens or second or
third mortgages) you will be responsible for paying them off in full as the new
owner. You’ll want to evaluate a property’s value by checking for money
encumbrances before auction whenever possible.

Auctions can be
postponed and/or canceled, so it is always a good idea to contact the
trustee/attorney to confirm dates and times once you locate a property, as well
as the day before the property is scheduled for auction. The trustee/attorney
will always have the most accurate information concerning auction dates.

Foreclosing Lender

If the property is
Bank Owned (REO – meaning “Real Estate Owned”), you will need to contact the
lender directly through their REO or asset management department. You can then
inquire about viewing and presenting offers on the property. With REO
properties, the lender will usually clear the title, but the potential bargain
is often less than pre-foreclosure and auction properties.

Some homebuyers
receive government-guaranteed financing, which includes loans guaranteed by the
Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
When these properties go into foreclosure, they are repossessed by the federal
government and sold by real estate brokers who work for the government. Buyers
interested in purchasing government-owned foreclosures must have a
government-registered broker write the purchase agreement.

4. Make an Offer

To gauge the
potential bargain of any property, you need the property’s estimated market
value, the amount of the outstanding loan, and the total of any other money
encumbrances on the property. Add together the outstanding loans and
encumbrances, plus any estimated repair costs, and subtract that total from the
estimated market value of the property.

You will be able to
decide what you are willing to offer on the property based on your results from
the bargain formula above, and your available cash and loan pre-qualification
letter. An offer should fall somewhere below the market value of the property,
but above the total outstanding loans and encumbrances.

How you make an offer
will depend on the status of the property and who is currently holding
ownership. If the property is in pre-foreclosure, your offer will be presented
directly to the owner in default and/or the foreclosing lender. If the property
is selling at auction, your offer, or bid, will be made at the auction. If the
property is bank owned, offers will be presented to the lender via their
REALTOR® representative.

This information is
meant as a guide. Although deemed reliable, information may not be accurate for
your specific market or property type. Please consult a REALTOR® professional
for more information on making a written offer.